I am Forbes' Opinion Editor. I am a Senior Fellow at the Manhattan Institute for Policy Research, and the author of How Medicaid Fails the Poor (Encounter, 2013). In 2012, I served as a health care policy advisor to Mitt Romney. To contact me, click here. To receive a weekly e-mail digest of articles from The Apothecary, sign up here, or you can subscribe to The Apothecary’s RSS feed or my Twitter feed. In addition to my Forbes blog, I write on health care, fiscal matters, finance, and other policy issues for National Review. My work has also appeared in National Affairs, USA Today, The Atlantic, and other publications. I've appeared on television, including on MSNBC, CNBC, HBO, Fox News, and Fox Business. For an archive of my writing prior to February 2011, please visit avikroy.net. Professionally, I'm the founder of Roy Healthcare Research, an investment and policy research firm. In this role, I serve as a paid advisor to health care investors and industry stakeholders. Previously, I worked as an analyst and portfolio manager at J.P. Morgan, Bain Capital, and other firms.

4/25/2011 @ 3:46PM2,679 views

What's Wrong with IPAB, Part II: "Cost-Effectiveness" is Subjective

Age-related macular degeneration, the leading cause of blindness in the elderly. Image via Wikipedia.

Last week, I asked a simple question: if government rationing of health care is the best way to reduce health expenditures, why is it that Britain, a country that aggressively rations care, has higher expenditure growth than the U.S.? Today, I continue with what will be a series of posts on the flaws of government rationing, as manifested by Obamacare’s Medicare Independent Payment Advisory Board, or IPAB.

Advocates of IPAB say that IPAB will allow us to make evidence-based decisions as to whether certain drugs, procedures, and tests are “cost-effective.” But these advocates spend a lot less time considering the basic question: what is cost effectiveness? Who gets to decide what therapy is effective enough to deserve a certain price? Who decides what that price should be? In the rest of the economy, it’s individuals, through supply and demand, who decide what something should be worth, in the form of a market price. Not so in health care.

Let’s take a real-world example, from the country whose system IPAB is modeled after: Great Britain’s National Institute for Health and Clinical Excellence, or NICE. (I will be discussing NICE extensively in this series on IPAB, since it is the best way for us to understand how IPAB will work in the real world.) NICE decides whether or not to recommend that Britain pay for various therapies using a utilitarian system called the Quality-Adjusted Life Year, or QALY.

“A QALY,” says NICE’s website, “gives an idea of how many extra months or years of life of a reasonable quality a person might gain as a result of treatment…We then consider cost effectiveness—that is, how much the drug or treatment costs per QALY…If a treatment [generally] costs more than £20,000-30,000 [~$33,000-$49,500] per QALY, then it would not be considered cost effective.”

Age-related macular degeneration (AMD) is the leading cause of blindness in the elderly. For reasons that aren’t completely clear, the capillaries that supply blood to the retinae begin to degenerate and deform, leading parts of the retina to degrade, ultimately causing blindness. In 2005, Genentech presented impressive clinical trial results of its drug Lucentis (also known by its generic name, ranibizumab), a vascular endothelial growth factor inhibitor, which demonstrated an unprecedented ability to reverse this disease, allowing many people who were going blind to see again.

Genentech sought to charge £2,000 a month for Lucentis, amounting to £28,000 for a 14-month course of treatment. NICE, however, thought this too expensive, and decided to only recommend payment for Lucentis if a patient was already blind in one eye. NICE’s logic being that a person who has two eyes, and loses one, is not that badly off; whereas a person who has one eye, and loses that one, is completely blind.

But while it’s true that it’s worse to go completely blind than to merely be partially blind, there is a cost to being blind in one eye. People who are blind in one eye lose the ability to perceive depth, and also have far narrower peripheral vision, among other problems, leading to accidents and injury. There are certainly plenty of people who, in a free country, would be willing to pay for the ability to see out of both eyes. But not NICE.

There ended up being considerable public outrage at NICE’s decision, and a year later, NICE grudgingly reversed its earlier guidance and recommended paying for Lucentis treatment in both eyes.

So, I’d like the advocates of IPAB to tell me two things: (1) Can they formulate an objective way for the government to determine how much Lucentis should cost? (2) Why shouldn’t individuals get to decide for themselves how much they would be willing to pay to see out of both of their eyes, instead of just one?

Saying that we should only pay for “cost-effective” things sounds nice. But it gets a lot thornier once you actually have to think about who gets to decide what is costly, and who gets to decide what is effective. These decisions are inherently subjective, and defy those who worship at the temple of technocracy.

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You asked:”if government rationing of health care is the best way to reduce health expenditures, why is it that Britain, a country that aggressively rations care, has higher expenditure growth than the U.S.?”

The question is posed as a choice between rationing and not rationing. I would point out that rationing already occurs right now in the US. People without health care insurance get no choices, their ration is zero. People with private insurance get the choices that their insurance company will cover, if the insurance company’s own internal IPAB/NICE approve it. Medicare, Medicaid, the VA, the Medical Corps of the various armed services all ration medical services.

The question is not that of “rationing vs. not rationing” but how it is done and who does it.

First, thanks for providing me with a conservative viewpoint on healthcare. You definitely are the minority report of health care blogs, but I find it very valuable to try to absorb as many viewpoints as I can as an American.

Now then.

You’ve written a fairly good argument against IPAB, but you haven’t included anything to convince me private options are significantly better. It is as if you feel that by inundating me with reason why technically Bud Light isn’t really Less Filling, I should obviously conclude it Tastes Great.

Wasn’t Avastin, a drug that had shown similar effectiveness at a fraction of the cost of Lucentis, at the crux of the debate? Why isn’t this mentioned? I have personal experience with insurance companies insisting a less expensive drug be tried as a gateway failure to a drug known to work, but costing more.

Is not the reversal of NICE’s stance by public demand NOT a demonstration of market forces at work?

You don’t speak at all to how the market’s private insurance companies are handling Lucentis claims – is it drastically better? The only suggestion of an answer I found with a quick Google search was that Genentech has an entire website and department set up to assist people with making high co-pays and completing claims processes.

There is a fundamental difference between a consumer, who voluntarily chooses to purchase or not purchase a service based on his own priorities and needs, and a government, which forces individuals to do what it sees as in their best interests.

Avastin was not at the crux of the debate about Lucentis, because its potential in age-related macular degeneration had not been well-established, and regardless Avastin is not approved for use in AMD. Rarely, if ever, does a payor force physicians to prescribe unapproved drugs before prescribing approved ones.

The reversal of NICE’s stance has nothing to do with market forces! First we need to understand what a market is: a market is a place where individuals come together in voluntary transactions. A government authority changing its mind about one of its decrees, based on political pressure, is the opposite of a market.

Private insurers reimburse for the use of Lucentis in both eyes. You can be assured if they did not, the Left would be up in arms about the evils of capitalism.

Your last paragraph hits the nail on the head and is something no one will ever have a good answer for.

But this blog is entirely in left field. The Medicare Modernization Act explicitly barred Medicare from using cost-effectiveness. The ACA goes one step further and bars medicare from making coverage decisions based on that evidence. In addition, the pricing of products like pharamceuticals in Medicare is a separate issue that is determined by Federal law (for parts A and B at least). You’re raising issues that aren’t even on the same continent at the IPAB’s legal authority.

You are, of course, correct. The point of this series of posts is to talk about the flaws of IPAB in its “ideal” (according to progressives) formulation, in which it would be able to make these kinds of decisions.

For now, as you point out, IPAB is quite restricted in what it can do — something I will address in a future post. I’m trying to discuss the problem in bite-sized posts, in order to make them easier to digest.

By the way, for more on Avastin vs. Lucentis, see this report from Andy Pollack, which suggests that Avastin may be less safe than Lucentis. I’ll write it up more fully over the weekend, once the complete results are published.

I appreciate the serious approach you bring to the health care debate. I understand that you wish to debate the theoretical IPAB, but I think you are building a bit of a straw man. Instead of prohibiting reimbursement for procedures based on cost effectiveness, Medicare might pay adjusted rates that encourage providers to use more cost effective treatments when they exist, as some other countries do. Your argument also compels one to ask – how is setting limits on government covered care stopping consumers from purchasing those services with supplementary insurance or cash? Surely they can still decide how much they would be willing to pay for any given service, but it may not be covered by their insurance (public or private).

One more thing, when convenient, can you post a link to your data? The OECD table I’m looking at only goes back to 2002. From 2002 to 2009, UK health expenditures grew 70 percent, as compared to 72 percent in the US. Its also worth noting that the UK absolute growth was only 44 percent of the US. However, when you average the yearly growth rates, the UK’s is slightly higher.